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Energy-buiness-review.com: Shell: using brand capital in Ukraine

24th April 2007
By Anne Marie Davis

Shell has entered into a joint venture with Alliance that will see 150 fuel stations rebranded.

Shell has signed a joint venture agreement with Alliance Group in Ukraine that continues the company’s recent strategy of investing in high-growth retail markets through partnerships. This policy allows Shell to capitalize on its brand while minimizing investment; a prudent move should these growth markets experience the same competitive pressures currently affecting Shell in its western markets.

The deal with Alliance gives Shell a 51% stake in the Russian firm’s network of 150 stations, all of which will be rebranded with the Shell name. Shell’s key competitors in the Ukranian market are now Lukoil, WOG, Alfa-Nafta, OKKO and Ukrnafta, as well as TNK-BP, which supplies some 1,200 dealer sites.

Faced with margin decline in the West, Shell is using its strong brand to establish a retail position in growing markets. New competitive pressures, such as low-cost supermarkets and a more astute customer base, have compromised margins in the company’s most developed retail markets, including France, the UK and the US. As a result, Shell has withdrawn from some western markets and has rationalized its site network in others. Meanwhile, in markets such as Spain and Ireland, where Shell has sold its sites to a third party, the Shell brand has often been retained.

Entering into JVs with companies such as Alliance is one of several strategies adopted by Shell in light of this western margin predicament. Other partnership markets include China, where Shell entered into a JV with Sinpoec and other national oil companies, and Turkey, where, in June 2006, the company signed an agreement with Turcas involving 1,200 stations.

Despite having setbacks in its maturing western markets, Shell is understandably keen to exploit growth potential in the East, where car ownership and motor fuel consumption are predicted to grow. Market maturity can come round quickly, however, and relatively buoyant markets such as Poland and the Czech Republic will be in a similar position to the UK within approximately five years, with markets such as Ukraine following suit.

As a result of impending market maturity, and Shell’s overriding objective to alleviate its relatively high levels of downstream exposure, the company appears reluctant to make huge investments on its own. Shell’s internationally recognized brand is allowing the company to enter growth markets in partnership with domestic oil companies, thus minimizing its capital commitments. As a result, Shell will be in a much better position to exit these markets should margins slip.

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